The destruction inflicted by Hurricane Harvey struck at the very heart of the Texas economy, shutting down one of the state’s largest shipping and distribution hubs, laying siege to the capital of its energy industry and pummeling some of its favorite tourist destinations.
While most of the economic damage will be temporary – and a massive influx of insurance, federal and other funding will flow in to rebuild – virtually every part of Texas will share at least some part of Harvey’s radiating pain, economists say.
Drillers in the Permian Basin will see the flow of oil back up as refineries sit flooded and idle. Farmers in the Panhandle will wonder when key export channels will reopen for the crops they’re harvesting now. State bean counters in Austin will have less sales, franchise and severance tax money to fund state budgets.
“The Houston area is roughly a quarter of the Texas economy,” said Ray Perryman, head of the Perryman Group, an economic consulting firm. “Add the other areas affected by this, and we’re looking at 30-plus percent of the Texas economy affected directly. … It cuts a broad swath across everything that happens in Texas.”
Say what you will about Austin leading the state into a 21st century high-tech economy or about the Dallas-Fort Worth Metroplex driving business and culture around the state, country and globe — Houston remains the state’s largest economic engine, and Harvey constricted virtually all the major arteries that bind it and Texas together.
Within Houston and the surrounding storm-stricken areas, the disaster will carry a heavy price in the short to middle term. Current estimates of the economic hit to Houston run anywhere from $30 billion to $50 billion or more. While the impact on local property values will vary in so large a metro area, aggregate values could drop as much as 15 percent or more as damage is assessed and flood maps are redrawn.
Beyond just its direct path, Harvey could become the most costly weather event in U.S. history, with an economic impact of $160 billion, according to an analysis by AccuWeather. That cost, about 0.8 percent of the U.S. gross domestic product, is similar to the combined effects of Hurricanes Katrina and Sandy, the firm said.
Yet, all the severed connections between Houston and the outside world will reopen as winds calm and waters recede. The fundamentals of the ongoing expansion of the Texas economy won’t suffer long-term damage, economists said, and even Houston and the surrounding areas should reap significant longer-term economic gains as they recover.
Perryman said the Houston metro area will rebound and thrive in the months and years to come, if only because of its sheer size and its wealth of job and other economic opportunities. Even in recent days, many local shops and businesses remained open in areas not flooded. Local hotels were packed with displaced residents and outsiders coming in to lend a hand.
As time passes, the billions of dollars expected to fund the reconstruction and recovery of the region’s infrastructure, housing, businesses and labor force will prime the economic engine all the more. In many cases, Perryman said, hurricane-stricken metro economies rebound and surpass previous levels of activity.
However, he said, viewing the results from a strictly economic perspective skews the picture.
“When we compute the gross domestic product, we count what we build but not what we tear down,” he said. “So if you rebuild a city exactly like it was before, you’d have a big increase in GDP and have the same city you had before. … From a social accounting standpoint, you would have a much different story.”
That socioeconomic perspective might reveal one of the few threats to the region’s long-term economic rebound – and by extension, the continued expansion of the Texas economy. Major metro areas that sustain hurricane damage typically bounce back stronger because of the rebuilding efforts, which tend to be an economic accelerator.
The one significant exception was New Orleans after Hurricane Katrina, when almost a third of the population permanently left the city.
Many of those displaced residents settled in Houston. Will they want to stay after Harvey? How about the nearly 60,000 net new residents who, arriving from 2014 to 2016, made Houston one of the country’s fastest-growing cities?
“That’s the danger here,” said Robert Dye, chief economist at Comerica Bank in Dallas. “If everyone stays in Houston and everyone decides this is a one-in-a-however-many-year event … Houston will be fine and probably in better shape five years down the road.”
Both Dye and Perryman said they expect Houston to recover quickly. Absent an unexpected and large defection from the city, the bulk of companies and workers could be back to business as usual by early next year, Dye said.
Crops and crude
For the most part, he said, the ripple effects on the Texas economy and budget should be even shorter-lived. But close down such a large portion of the state’s economic lifeblood, and the pain will spread. The state’s agriculture and energy sectors might be among the most vulnerable.
With the harvest for some key crops in full swing, sustained delays at Houston, Galveston and Corpus Christi ports could wipe out a year’s work. In 2016, about 13 percent of the value of U.S. cereal exports, such as wheat and rice, departed from ports in the Houston-Galveston district, according to the Census Bureau’s USA Trade Online data.
Closing down one of the nation’s largest ports, even temporarily, has much more widespread consequences. Last year, those Houston-area ports shipped $91.6 billion worth of products, 6.3 percent of the U.S. total.
Houston-area ports particularly rely on a huge volume of petroleum and petrochemical imports and exports. Crude oil and related products accounted for a third of the total value of goods that move in and out of the those ports.
As of midday Wednesday, shipments of crude, distillates and petrochemicals — like virtually every other product — remained at a standstill, according to a daily report from S&P Global Platts Energy. Refineries in the storm-stricken area had shut down or scaled back production by as much as 4 million barrels per day, roughly 22 percent of the U.S. total, the firm estimated.
That hit, while temporary, comes at a difficult time for the state’s oil and gas companies. While the sector had generally stabilized after a sharp drop in commodity prices, prices remained relatively low and most industry officials had expected drilling to slow later this year.
“What would the effect of Hurricane Harvey be on the Houston economy if oil was at $100 a barrel and we were just drilling and everything was happening?” asked Dye. “We have an energy industry running on tighter margins, businesses are stressed already, and now they’re unfortunately facing one more layer of stress.”
There’s no good time for a hurricane, of course, but the timing could’ve been worse for the coastal economies that rely on summer’s influx of beachgoers and directly employ 170,000 workers in the tourism sector, industry officials said.
Harvey arrived during a “shoulder season” for Gulf Coast tourism, said Scott Joslove, president of the Texas Hotel and Lodging Association. While the Labor Day weekend “sure can be big” for towns along the coast, he said, the hurricane “didn’t ruin spring break or the peak of the summer season.”
Tourism is among the top industries in Texas, and the regions in the storm’s path – including beach towns from Galveston to Port Aransas, as well as Houston – constitute some of the biggest draws in the state.
Joslove said it’s too early to tell the extent of the damage on the coastal communities, infrastructure and economies that rely so heavily on tourism. Many properties in Rockport and Port Aransas suffered severe damage, and reports for other areas were still coming in. But early indications suggested that most hotels in the area remain standing and will be functional once power, water and infrastructure are restored, he said.
Still, the storm did cut off the tail end of the peak summer season, said David Teel, president of the Texas Travel Industry Association, and it will impact the so-called “winter Texan effect” — when people from cold-weather states and Canada essentially take up residence on the coast during winter months.
Those winter Texans “really become part of the local economy down there,” Teel said, and many of them might choose to come down despite the damage and might help with cleanup and recovery efforts.
“I’m optimistic we are going to bounce back,” he said. “For as big as Harvey is, what we’ll find out is that Texas has a bigger heart than Harvey.”